Euro-area recovery set to continue while politics get messier

The bad economic news these days comes out of China and from the US manufacturing sector while the Euro area performs reasonably well by its potential. In 2015, economic output increased by 1.5% and employment by around 1%, the unemployment rate fell from 11.2% to 10.5%, and consumer prices were stable. For both 2016 and 2017. Last year, private consumption contributed two thirds to GDP growth. The outlook remains promising. Forward-looking indicators are pointing to continued employment growth to the tune of 1% y/y.

The unemployment rate is expected to print at 10% by the end of this year and to 9¼% by end-2017. Wage growth is likely to remain subdued with an expected increase in compensation per employee of around 1.5% this year and slightly more in 2017. Coupled with rising employment and low inflation this means that private consumption can grow by more than 1½% this year and next.

After years of fiscal restraint, government consumption is likely to grow by around 1½% in 2016 and 2017. The stance of fiscal policy turns form neutral to slightly expansionary, mainly due to the need for increased government spending given the large influx of refugees e.g. into Germany, Italy and Greece.

Capital spending is the missing link that could turn a rather sluggish recovery into a strong one. A moderate pick-up is expected, if not more. In several of the larger countries capacity utilisation is too low to expect the creation of additional capacities. Also for demographic reasons, Europe may not be the best place to invest, despite very low interest rates.

Slow growth in Emerging Markets and sand in the wheels of globalisation cast a shadow over the export outlook. That said, the most important trading partners for the Euro area are 1) other EU member countries, most of all the UK, and 2) the US which both are considered  to be robust. The euro is likely to weaken further, making Euro-exports more competitive or increasing exporters' margins.

"We expect imports to grow faster than exports, resulting in a small negative contribution from net exports to GDP growth", says Nordea Bank in research note.